Gratuity is an amount payable in lump sum to an employee by his/her organization at the time he/she retires or leaves the organization. It is a retirement benefit offered by many organizations to employees depending upon whether the employee meets the criteria of continuously working for at least five years with the organization. There are certain rules and conditions laid out with regards to gratuity in India, by the Payment of Gratuity Act of 1972.
Many employees often wonder how to calculate the gratuity amount that they should be receiving. There are many ways to calculate gratuity, the easiest one being through an online gratuity calculator. Here, we will discuss the concept of gratuity calculator, eligibility criteria for gratuity, and other important aspects pertaining to gratuity.
Table of Contents
- 1 – What is Gratuity?
- 2 – How to calculate gratuity?
- 3 – What eligibility criteria are applicable for receiving Gratuity
- 4 – What is Fisdom’s online gratuity calculator?
- 5 – How to use Fisdom’s gratuity calculator?
- 6 – What are the benefits of using Fisdom’s gratuity calculator?
- 7 – How are the taxation rules for gratuity?
- 8. Where to invest the lump sum gratuity amount received?
- 9 – Conclusion
- 10. FAQs
What is Gratuity?
Gratuity is the amount paid by an employing organisation to its employee for the services provided by him/her throughout the employment term. An organisation pays a gratuity amount to an employee either during retirement or when the employee is leaving the job, as long as all the terms and conditions of availing gratuity are fulfilled. To avail gratuity, an employee must render services to an organization for at least five years. In case the employee dies or is disabled due to an accident or disease, the gratuity amount is paid before completion of the five-year period.
The maximum gratuity amount that one can claim in entire working life and is tax exempt is Rs. 20 lakhs.
How to calculate gratuity
The formula to calculate gratuity is:
Gratuity (G) = n*b*15/26
n = Number of completed years in current organization
b = basic salary per month as per latest payslip (along with dearness allowance and commission received on sales, if applicable)
Important points on gratuity formula
- Gratuity calculation considers the total number of working days per month as 26
- Wages in this case are estimated at the rate of 15 days
Let us understand this calculation better with the help of examples:
a. Employees of organisations covered under the Payment of Gratuity Act
For example, Ms. Nisha has been working with XYZ Pvt. Ltd. for the last seven years and three months. Her latest salary per month is Rs. 1,00,000. The gratuity amount that she would receive is:
Gratuity = 1,00,000*7*(15/26) = Rs. 4.03 lakhs
Here, the total working years is seven. This is because Ms. Nisha’s work experience is under six months in the current year. In case the work experience exceeds 6 months in a particular year, the gratuity formula will consider eight years as the total work period.
b. Employees of companies not covered under the Payment of Gratuity Act
Employees working with organizations that are not covered under the Act can also avail gratuity. The formula applicable here is:
Gratuity (G) = n*b*15/30
Here, the gratuity amount payable is calculated based on half month’s basic salary for every completed year.
For example, Mr. Rahul is an employee of ABC Pvt Ltd. since the past ten years and nine months. His basic salary according to his latest payslip is Rs. 85,000. The gratuity amount that he can get is:
Gratuity = 85,000*10*(15/30) = Rs. 4.25 lakhs
In this example, the total number of working years is considered as each complete year. Although Mr. Rahul has been working with the organisation for ten years and nine months, his total working tenure is ten years instead of 11.
What eligibility criteria are applicable for receiving Gratuity
Mentioned below are the eligibility criteria that an employee must satisfy for securing gratuity payment:
- An employee must have extended his/her uninterrupted services to the same organization for at least 5 years
- It is available for employees to meet the superannuation eligibility criteria
- An employee who is retiring from his/her services is eligible to receive gratuity
- Gratuity can also be paid in case of death of an employee or if an employee gets disabled as a result of an accident or ill-health
As per the Payment of Gratuity Act, here is the list of organizations eligible for securing gratuity:
- Companies in Private sector
- Public Sector companies
The Payment of Gratuity Act 1972 covers all organizations that employ 10 or more people or may have employed 10 or more people at any point in the last 12 months.
What is Fisdom’s online gratuity calculator?
Fisdom’s online Gratuity calculator is a tool that allows employees to estimate the amount of gratuity that they can earn upon retirement. An employee is eligible to receive gratuity only if he/she has worked with a company for at least five continuous years.
How to use Fisdom’s gratuity calculator?
Here are the steps to be followed for calculating your gratuity using the Fisdom gratuity calculator:
- Enter your basic salary and the dearness allowance (optional), either by manually plugging in the figure or using the slider.
- Enter the total number of years of employment with the organisation.
- The gratuity calculator then calculates the total gratuity amount that is payable to you.
- You can use the calculator for free and multiple times to recalculate the applicable gratuity by amending the input figures.
- The calculator gives out two sets of figures: a) the total gratuity amount, and b) the gratuity amount in case the organisation is not covered under the Gratuity act.
What are the benefits of using Fisdom’s gratuity calculator?
The Fisdom gratuity calculator is an automated tool which only requires users to enter the basic salary and the total years of service to fetch the applicable gratuity amount. It allows users to have an easy estimate of the gratuity amount that one should receive after five or more years of continued service.
The online gratuity calculator provides gratuity figures within a matter of a few seconds. Users can plan their finances better by estimating the gratuity amount which can be invested for wealth creation in the future.
The online gratuity calculator can be used from anywhere at any time and for free.
Payment of gratuity
According to the Payment of Gratuity Act 1972, gratuity payment is made to an employee under the following cases-
- If an employee retires
- If an employee expires
- If an employee is terminated
- If an employee resigns
- If an employee opts for VRS
- If an employee is disabled following an accident or disease
What are the taxation rules for gratuity?
The tax applicability on gratuity amount depends on the eligible employee’s category. Here are some important points to note on taxation of gratuity earnings:
- Government employees (central or state or local authority) who receive gratuity amount do not have to pay any income tax on the same.
- For a private sector employee employed with an organisation that comes under the Payment of Gratuity Act, the least of the below-mentioned amounts is exempt from income tax:
- Rs. 20 lakhs
- Actual gratuity amount received
- Eligible gratuity amount
Where to invest the lump sum gratuity amount received?
The recipient of a lump sum gratuity amount may consider some of these options for investing the money depending on financial goals, risk tolerance, and time horizon:
- Bank savings account: This option offers low risk and easy access to funds, but the interest rate may be low.
- Bonds: Investing in bonds can offer a relatively stable return, but the yield may be lower than other investment options.
- Stocks: Investing in stocks offers the potential for higher returns, but also comes with higher risk.
- Mutual Funds: Investing in mutual funds offers the opportunity to diversify their portfolio, reducing risk and potentially increasing returns.
- Real Estate: Investing in real estate can offer a steady stream of passive income, but requires significant upfront capital and research.
- Retirement account: They can consider investing the lump sum in a retirement account, such as a 401(k) or an IRA, to benefit from tax incentives and grow the funds for their future retirement years.
With a gratuity calculator, those who are set to receive gratuity can estimate the amount to be received and accordingly take long-term financial decisions for wealth creation and regular income from investment. Investors who are set to receive a large chunk of gratuity must plan their investment options with appropriate research, such that it can result in substantial gains in the future.
Gratuity is paid only post completion of 5 years of employment. If you resign before completion of 5 years of service, then you do not meet the eligibility criteria for gratuity.
Temporary staff or contract workers are all eligible to receive gratuity amount, provided they come under the category of ‘employees’ of the organization.
Yes, an employee can submit a nomination by filling Form “F” while joining their organisation. It is possible to nominate one or more family members to receive the gratuity amount in case of death of the employee.
A company that falls under the Gratuity Act is mandated to pay gratuity to eligible employees even if it is under financial loss. However, if an employee’s service is terminated due to inappropriate conduct, the employer is not liable to pay gratuity.
As per a ruling by Madras High Court, employees in their fifth year of service who have completed 240 days are eligible for gratuity.